System Change Investing and the Sustainable Development Goals

System Change Investing and the Sustainable Development Goals

The UN Sustainable Development Goals (SDGs) are one of the
most important milestones of the sustainability movement. Broad embrace of the
goals by companies and governments shows growing awareness of the need to
effectively address major environmental, social and economic problems. In his
2019 letter to CEOs, Larry Fink, CEO of Blackrock, the world’s largest asset
manager ($6 trillion in assets), said that companies should expand their
purpose from narrowly benefiting shareholders to broadly benefiting society.
Over 8,000 companies are striving to do this by voluntarily adopting a B-Corp (Benefit
Corporation) structure that seeks to benefit all stakeholders.

Voluntary efforts such as these provide many benefits, but
cannot come close to achieving the SDGs. Economic and political systems often
place shareholders before all other stakeholders and do not hold companies
fully responsible for negative environmental and social impacts. These systems
compel all companies to degrade the environment and society. They are the root
causes of the environmental, social and economic problems addressed by the SDGs.

System change is the most important action needed to achieve
the goals. This article provides a big picture view of system change and
discusses practical options for achieving it. System Change Investing (SCI), a
high-leverage, short-term system change strategy, is emphasized.

The Big Picture

The big picture has space and time dimensions. A space or
geographic perspective shows that the economy is a sub-element of human
society, which is a sub-element of the whole Earth system. This system includes
immutable physical and nonphysical laws of nature, such as equality. A big
picture time perspective shows that all human systems which violate the laws of
nature change, usually by collapsing.

This perspective also shows similarities between past and
modern systems. To illustrate, current economic and political systems are
similar to slave owning societies in ways that are not obvious without this
higher perspective. Plantation owners in the early southern US, for example,
grew up in a society where slavery was broadly accepted and promoted. Many
slave owners saw themselves as good people who treated their family, friends,
neighbors and sometimes slaves well.

Preachers assured them that slavery was divinely ordained.
Their senses of self-worth often were tied to their slave and other property
holdings. Slave owners who tried to free their slaves or treat them more kindly
frequently were criticized and pressured to conform with current systems. Voices
opposing slavery increasingly were heard in the southern US. But slave owners
were supported by their families, communities and society. Rationalizations and
close-mindedness often were used to block out dissenting voices.

During a typical conversation, one might have heard slave
owners discussing good deals at slave markets or the most effective ways to
punish runaway slaves. If people today could go back in time and hear these
conversations, nearly everyone would be horrified. Many would exclaim, you’re
insane! I don’t even know where to begin to explain how wrong you are.

The same situation exists today. Nearly all future people
will look back in horror at many of our actions and systems. This is not
obvious to most people for many of the same reasons that the horrors of slavery
often were not obvious in the early southern US (except to slaves).

People grow up in current economic and political systems.
Their lives frequently depend on them. Benefits of current systems are taught
in school and heavily promoted. Business and political leaders usually are
admired by their families, friends and communities. Young people often strive
to emulate them. Like many slave owners, modern business and political leaders
are good people who frequently believe they are doing God’s will. They strongly
intend to benefit, not harm society.

And yet like slave owners, they are unintentionally causing
massive harm. Humans are taking far more resources from nature than it can sustainably
provide, and dumping far more waste into nature than it can sustainably
process. This has placed every major environmental life support system in rapid
decline, with some regional exceptions.

Inappropriate government influence enables those at the top
of society to unfairly concentrate public wealth. Sixty-three people own as
much wealth as the bottom 50 percent of humanity (3.8 billion people).
Forty-three percent of citizens in the US cannot afford to meet basic needs.
Billions of people suffer and struggle to survive while a small group at the
top has far more wealth than they could reasonably spend.

Media and vested interest deception divides people and
prevents them from working together on their many common interests, such as
protecting life support systems and using the public wealth to equally and
fairly benefit all citizens. Experts have been raising awareness about
environmental and social degradation for over 20 years. But business and
political leaders who attempt to address these problems often face strong
pressure to abide by current systems and continue harmful actions.

Like slavery, modern economic and political systems grossly
violate the laws of nature. They inevitably will change, probably soon given
the massive degradation and suffering they are causing. The Roman Empire and
other civilizations collapsed in large part because the people controlling
society were insulated from the suffering of average citizens. They resisted
change until flawed systems finally collapsed, usually quickly, as occurred
with the end of slavery in the US and fall of communism in the Soviet Union.

Big picture space and time perspectives show that this is
the trajectory of modern society and our flawed economic and political systems.
These well-meaning, but shortsighted systems not only allow massive
environmental and social degradation. They compel it. Modern systems will
change through voluntary or involuntary means. Involuntary change (collapse) would
cause unprecedented suffering and disruption, due to the large, interconnected
nature of modern society and the many environmental and social tipping points
that we are near or beyond.

Voluntarily changing economic and political systems can seem
impossible, like ending slavery often did in the early US. But slavery changed,
and we will too. Humanity is hugely talented, creative and resourceful. Through
technology, we are more networked and interconnected than ever before. Millions
of individuals, organizations, communities and countries are pioneering
sustainable lifestyles and approaches.

A big picture perspective shows that the technology,
sophistication and coordination of nature are nearly infinitely greater than
that of humanity. But we are parts of nature. We can be vastly more sustainable
and truly prosperous then we are now. We can evolve our systems before nature
and reality evolve them through collapse. We can do this if we devote the time,
attention and resources needed to make system change happen.

System Change

Modern economic and political systems were developed from a narrow,
reductionistic perspective that ignores many relevant factors. As a result,
these systems produce unintended consequences, such as widespread environmental
and social degradation. As Einstein said, we must think at a higher level to
solve our most complex challenges. That higher level is whole system thinking.
It is based on the reality that human society is an interconnected part of the whole
Earth system. Effective whole system approaches take all relevant factors into
account and eliminate unintended consequences. They have the potential to
manifest in human society the nearly infinite sophistication, coordination and
prosperity already present in nature.

Shortsighted economic and political systems compel all
companies to degrade the environment and society, mainly by not holding them
fully responsible for negative environmental and social impacts. These systems
usually compel companies to place shareholder returns before the environment,
labor, customers and all other stakeholders. If there are conflicts between
shareholder returns and any other factor (as there often are), shareholders
usually take priority. When companies are not held fully responsible, it is
impossible to voluntarily eliminate all negative impacts (i.e. stop harming
society) and remain in business.

There are many economic and political system flaws that fail
to hold companies fully responsible. These include time value of money,
externalities, limited liability, inadequate measurement of social well-being,
overemphasis of economic growth and shareholder returns, and inappropriate
government influence driving extensive corporate welfare and concentration of
wealth. Time value of money devalues future generations and resources, and
thereby often compels companies to harm and degrade them. As discussed under
limited liability below, not holding companies responsible for the costs and
negative impacts they impose on society (externalities) increases total
societal costs and compels businesses to cause harm.

What gets measured gets managed. Our myopic systems make the
increasingly incorrect assumption that maximizing economic growth will maximize
the well-being of society. Economic growth is a means to the end of social
well-being. Focusing measurement and management on the means makes it the end
goal. Economic growth obviously provides benefits. But it also drives growing
environmental and social problems. Putting economic growth and shareholder
returns before all else is unintentionally destructive and ultimately suicidal.
A rational, enlightened society would focus measurement and management on
maximizing the long-term well-being of society.

Economic growth mainly measures business sales growth. Most
business assets are owned by a small group of wealthy investors. Focusing the
measurement and management of society on economic growth places financial
returns to wealthy citizens ahead of all else, including the survival of
humanity. This myopic focus harms everyone, including wealthy investors because
it degrades the world in which they and their children must survive.

The requirement to provide ever-increasing shareholder
returns eventually pushes everything else aside. To illustrate, for many years,
a substantial share of profits were used to increase wages, develop new
products, invest in property, plant and equipment, and take other actions that
broadly benefit society. However, more recently, extensive profits, often over
95 percent, are used to buy back shares. This action was illegal in the US for
much of the 1900s. It was seen as stock market manipulation. But business
influence of government drove deregulation beginning in the 1980s. As a result,
many illegal actions were made legal, including stock buybacks. This
contributed to flat wages, concentration of wealth, extensive financial
speculation and the 2008 financial crash.

Under our myopic, unintentionally destructive systems, very
generally speaking, companies can voluntarily mitigate about 20 percent of
short-term and long-term, tangible and intangible, negative environmental and
social impacts in a profit-neutral or profit-enhancing manner. Beyond this
point, mitigation often increases costs. If companies continue voluntarily
reducing negative impacts, they will put themselves out of business long before
reaching full impact mitigation.

Modern economic and political systems grossly violate the
rule of law. This principle says that individuals and companies should be free
to do what they want, provided that they do not harm others. The rule of law
usually is applied well to individuals. They are held responsible through many
criminal and other laws. However, the principle is applied poorly to companies
in the US and many other countries. Businesses are allowed to cause extensive
harm.

Laws and regulations usually prohibit immediate and obvious
types of harm, such as selling products with ingredients that quickly sicken or
kill people. However, extensive, less obvious harm is allowed by economic and
political systems. Many types of harm occur over the longer-term and are difficult
to quantify or attribute to particular businesses. Intangible harm is real, but
often impossible to quantify, such as the divorce, depression, crime and other
problems that frequently result from laying off employees in small towns. Companies
often are compelled to cause harm when it is not immediate and obvious, no
cost-effective alternatives are available, and the probability of being held
responsible is low, for example, due to inappropriate influence of government.

If the choice is benefiting shareholders in the short-term
or protecting other stakeholders from nebulous, longer-term harm, business
leaders frequently put shareholders first. If they do not, they might lose
their jobs or put their companies out of business.

Failing to hold business responsible is one of the most
important aspects of current systems that future generations will look back on
with horror and disbelieve. As they attempt to survive in a severely degraded
world, they often will think, how could past generations have been stupid
enough to not only allow, but compel companies to cause massive environmental
and social harm and degradation.

Of course, we are not stupid, as slave owners were not. We
simply are not looking at the big picture. Enough of us do not see the massive,
often life extinguishing harm we are causing. Once we better understand this,
we will do whatever it takes to stop destroying ourselves, as we finally did
whatever was necessary to end the horror of slavery.

Limited liability illustrates the destructive aspects of
current systems. People in the future will look back on it the way we look back
on slavery. We frequently take limited liability for granted because it is a
major part of our economic system. Students often are taught the benefits, but
not the harm it causes.

Individuals and small business owners are held fully
responsible. If they cause harm, their personal assets can be taken to pay for
it. There would be no corporations without investors. Therefore, investors are
the ultimate responsible parties for harm caused by corporations. But corporate
owners are not held to the same responsibility standards as individuals and
small business owners. They receive all of the financial upside, but their
downside is limited, usually to the amount of their investment.

Limited liability is a deceptive term. Liability does not
disappear. It is transferred, mostly to taxpayers. A more accurate name would
be transferred liability or taxpayer liability. For example, if a limited
liability company with $1 million of equity investment caused $100 million of
harm, investors might lose some or all of their investment if the value of the
company declines. But they usually could not be compelled to pay for the harm.
Insurance might cover some of the cost. But taxpayers often would be required
to pay for most of the harm, or suffer reduced quality of life.

Limited liability is an unfair form of socialism. Taxpayer/citizens
are compelled to act as the owners of business on the downside (by paying for
negative impacts) while receiving none of the financial upside. A limited
liability corporation is not a private entity. It is a grossly unfair
quasi-public structure.

Limited liability drives substantial environmental and
social degradation, while greatly increasing total costs to society. High risk
activities often provide high financial returns. Flawed systems usually compel
companies to pursue the profit-maximizing strategy. High financial risk frequently
limits investment in harmful areas. Transferring the downside to taxpayers
improves the risk/return profile for investors and often compels companies to
engage in the riskiest activities. This can increase costs to society by
compelling citizens to pay to clean up problems caused by business. Preventing
problems usually is far less expensive than cleaning up or resolving them. Major
problems, such as cleaning the oceans and atmosphere, often cannot be resolved.
Citizens will suffer degraded life support systems or not survive.

Many private sector activities would not exist in their
current forms if taxpayers were not covering most of the downside, such as
nuclear power and many genetically engineered crops, synthetic chemicals and
nanotechnology food ingredients. If companies were held fully responsible for
the burdens, risks and costs they impose on society, they would be compelled to
provide products and services in a nondestructive manner. This would vastly
lower total costs to society while substantially improving quality of life.

SUVs provide another example of how future generations might view us differently than we see ourselves. If we are unable to significantly reduce greenhouse gas emissions and predictions of substantial negative climate change impacts occur, future generations will be living in a world that is severely degraded by our actions. They might be angry that we drove unnecessarily large, polluting, fuel-inefficient vehicles when we had the technology to develop far more efficient vehicles, transportation systems and community layouts.

Those owning SUVs in the future might be strongly condemned.
But criticizing people today for owning them could seem inappropriate. In the
same way, anyone attempting to own slaves today would be severely condemned.
But owning slaves in the early southern US was seen as normal and acceptable,
as owning an SUV is today. A big picture perspective clarifies our
unintentionally harmful actions and the systemic changes needed to improve them.

The Sustainable
Development Goals

The SDGs are a large step in the right direction. Many
countries and companies are striving to achieve them. Wide embrace of the goals
shows humanity’s rapidly growing awareness of the vast harm we are causing and
the need to stop it as quickly as possible.

System change is the most important action needed to achieve
the SDGs. The 2030 targets in particular cannot be met without it. Flawed
systems are the root causes of the environmental, social and economic problems
addressed by the SDGs. The goals largely are focused on symptoms (problems), instead
of causes (economic and political systems). National, corporate, NGO and other
efforts to achieve the SDGs provide many benefits, and therefore should be
greatly expanded. However, voluntary, symptom-focused efforts cannot come close
to achieving the goals. Focusing on symptoms instead of causes is like trying
to put out a fire while simultaneously throwing gasoline on it. Complementary
system change work is needed.

Several reports have identified extensive business
opportunities related to the SDGs. But companies only can achieve about 20
percent of the goals under current systems before they violate the obligation
to maximize shareholder returns or run up against other systemic barriers to
sustainability. System change will greatly accelerate and facilitate SDG
achievement.

System change is implied in the SDGs. Discussion of
inclusive societies and institutions implies democracy and sustainable
political systems. Discussion of sustainable infrastructure, production and
economic growth implies sustainable economic systems. As companies strive to
achieve the SDGs, they might seek mid-level (sector-level) system changes, such
as incorporating a particular externalized cost into prices. But it seems
unlikely that the SDGs will drive high-level (economic and political level)
system change at the pace and scale needed to achieve the 2030 targets and
avoid system collapse.

High-level system change probably represents at least 80
percent of the sustainability solution. One of the most important overarching
high-level system changes is to hold companies fully responsible for negative
environmental and social impacts (i.e. effectively apply the rule of law to
business). Flawed, myopic systems unintentionally place business in
systemically-mandated conflict with society. Holding companies fully
responsible for harm removes these conflicts. It makes acting in a fully
responsible manner (by eliminating all negative impacts) the profit-maximizing
strategy. This important system change is implied in SDG target 16.3 (Promote
the rule of law).

System change can make SDG work far more effective. The 17 SDGs
and 169 targets in them can produce counterproductive or redundant efforts as
companies, governments and other parties spread their work across many
different goals. The SDGs have a common root cause – reductionistic thinking
and resulting flawed systems. Therefore, they have a common solution – using
whole system thinking to evolve economic and political systems into sustainable
forms. System change can drive substantial or complete achievement of many SDGs
with little or no issue specific work.

To illustrate, the root cause of human-induced climate
change is not greenhouse gas emissions. It largely is the flawed economic and
political systems that compel companies to emit these gases. Holding businesses
fully responsible for these emissions could substantially resolve climate
change with little climate specific work. System change is highly efficient
because the same high-level system change strategies used to address climate
change (i.e. holding companies fully responsible) will significantly resolve
many other environmental, social and economic problems.

The SDGs can facilitate system change by providing a partial
vision of sustainable society. This helps to identify the system changes and
other actions needed to achieve the vision. It appears that the goals sought to
balance addressing major sustainability issues with maximizing national and
corporate participation. For example, key issues, such as democracy, a global
bill of rights, religious freedom, population stabilization and limits to
growth, are not adequately or specifically addressed. Doing so might have
limited participation from countries that suppress democracy, violate human
rights, favor particular religions or have high projected population growth
rates.

Making the goals voluntary and emphasizing sustainable
economic growth, and high economic growth in the least developed countries, can
increase corporate participation. It enables companies to address growing
environmental and social concerns, while maintaining their systemically-mandated
focus on maximizing shareholder returns.

Stating all of the requirements for sustainable society,
including applying the rule of law to business, limiting population and
economic growth, and effectively enforcing a global bill of rights, could
substantially limit national and corporate participation. It seems that the
framers of the SDGs wisely downplayed these issues and made compliance
voluntary. Bringing many countries and companies to the SDG table enables
humanity to more effectively collaborate and resolve longer-term, complex
challenges, such as high-level system change and the major sustainability
issues not specifically addressed by the SDGs.

Current System Change
Efforts

Growing awareness that system change is the most important
action needed to achieve the SDGs and sustainability in general is driving
increased system change efforts. Academic experts have been studying systems
theory, system dynamics, systems thinking, economic reform and similar system
change-related topics for decades. A growing number of organizations use this
and other research to provide system change services to companies, governments,
communities, NGOs and foundations.

Most of this work focuses on system change process, rather
than content. Vendors often advocate system change principles and specific
processes for implementing them. System change work frequently is focused on
the company, sector or community level. The goal often is to model smaller
scale approaches that can be scaled up to higher levels and applications.
Complex models identify detailed linkages and feedback loops that frequently
are difficult for average citizens to understand.

The growing number of economic reform efforts reflects a
broader approach to system change. But this work often does not take the whole
system into account, and thereby does not adequately address relevant root
causes, systemic barriers, key leverage points and optimal solutions. In
addition, the emphasis frequently is on encouraging companies to voluntarily
implement circular economy and other sustainable economy principles in their
own organizations, rather than collaboratively change the overarching economic
and political systems that largely constrain and control corporate behavior.

A Putnam Investments article[i] discussed several aspects
of corporate and financial sector system thinking. These include considering how
corporate activities impact the environment and society, expanding the
corporate purpose beyond attaining superior investment returns, striving to
achieve the SDGs, and adopting longer-term investment horizons.

All of these activities are important components of system
change. Like SDG efforts, the above system change actions provide many
benefits, and therefore should be greatly expanded. Also like the SDGs, the
above system change work is a large step in the right direction. But broader,
complementary system change efforts are needed to achieve the SDGs and evolve economic
and political systems into sustainable forms.

System change content (i.e. identifying system flaws and
providing practical, specific strategies for resolving them) is just as
important as system change process. It can greatly accelerate and facilitate
collaborative system change efforts. Current economic and political systems
severely constrain the ability of companies to voluntarily reduce negative
impacts. The most important system change work is improving these unintentionally
destructive systems.

Scaling up smaller efforts sometimes is not practical or
relevant to larger scale issues. Economic and political systems largely are
controlled nationally. Even with the global financial system, the power to
constrain the destructive aspects of it mainly resides at the national level.
As a result, large-scale national system change efforts are essential.

Citizens collectively are the most powerful force in
society. They could quickly change any government or business. However, they
cannot protect their common interests unless systemic problems and solutions
are made comprehensible. Economic reform is important. But political reform is
more important because the government/political realm largely controls the
economy, even with laissez-faire government. Timely, effective economic and
political reform only can be achieved through a whole system approach that
addresses and links all relevant factors.

Whole System
Approaches

These strategies apply whole system thinking to the whole
Earth system and its sub-element human society. They take all relevant physical
and nonphysical aspects of society into account. All actions begin in the mind.
Modern society and its many challenges are a reflection of our limited,
reductionistic thinking. This thinking is based on the illusion of separation
from nature and each other. For example, the dominant view of business
(companies are independent entities that should focus mainly on their own
well-being) is an irrational, reality-ignoring, unintentionally destructive
position. In reality, businesses and the economy cannot exist without the
environment and society.

Whole system thinking shows that it is not logical to
consider the well-being of business apart from the well-being of society. A new
business approach, called purpose-driven business, is based on this idea. It
helps leaders to expand the purpose of their companies from narrowly benefiting
shareholders to broadly benefiting society.

The book Global System
Change: A Whole System Approach to Achieving Sustainability and Real Prosperity
uses whole system thinking to provide practical, integrated, systemic solutions
to the major challenges facing humanity. It addresses and links all major
physical and non-physical aspects of society, including environmental, social,
political, economic, psychological, spiritual and religious. The approach empowers
people by describing complex issues in ways that non-expert citizens can easily
understand. Global System Change
describes the many economic and political system flaws that compel companies to
degrade the environment and society, the specific types of harm caused by
businesses, and the numerous deception techniques used by vested interests to
mislead the public and avoid being held responsible for negative impacts.

Whole system thinking represents a higher level of
consciousness and awareness. Individuals recognize that they are parts of
larger systems and ultimately cannot prosper apart from them. Lower levels of
consciousness and the illusion of separation create fear and belief in the need
for competition. Whole system thinking shows the importance of emulating the
nearly infinitely greater implied intelligence all around us in nature. The
overwhelming force in healthy natural systems and nature overall is cooperation,
not competition. Limited competition occurs at the individual level. But when
the overwhelming force is competition, as in a body with terminal cancer, the
system is dying. Whole system thinking shows that increased cooperation in
human systems and society is essential for achieving sustainability.

Non-judgment is a critical system change principle discussed
in Global System Change. Yelling at
slave owners, or calling them insane or stupid, would not have been an
effective way to engage them in transitioning the economy away from slavery. It
also would not be an effective way to engage modern business and political
leaders in ending the extensive harm caused by business. As noted, these
leaders intend to benefit society. The unintentional harm they cause is
compelled by flawed systems. As a result, judgment and criticism often are
inappropriate and counterproductive.

We do not view current business and political leaders the
way we see historical slave owners. But many future people probably will. If
they do, their judgment largely would be misplaced. The enemy is not our
well-intentioned leaders. It is the flawed systems that compel good people to
do bad things.

System Change
Implementation

System change could take many forms. Work is needed on several
levels. Excellent system change work already is being done at the company and
community levels. Many organizations are involved in collaborative sector-level
(mid-level) system change. But evolving economic and political systems into
sustainable forms (high-level system change) is the most important and complex work
needed.

Two critical aspects of high-level system change are
awareness raising and collaboration. Extensive media efforts are needed to
raise public awareness about the essential need for economic and political
reform and the huge benefits that will accrue from it. Growing public pressure
will encourage business and government to effectively work for system change.

Helping people to think at a higher, broader level
facilitates system change. We tolerated slavery 200 years ago. But we would not
tolerate it today, because we understand the horrible, evil nature of slavery.
We now are in the process of extinguishing vast amounts of life on this planet,
including human life to a growing degree. Lack of awareness and failure to
think from a whole system perspective are causing us to act like a cancer on
this planet. Once enough people understand this, we will end our
unintentionally destructive ways. Vested interests will no longer be able to mislead
people into supporting current systems, and thereby block beneficial systemic
change.

High-level system change only can be achieved through
collaboration. These efforts could be launched and managed by combinations of
NGOs, academia, business, government and international organizations, such as
the UN. Many groups already are engaged in economic reform and other system
change activities. For example, the Wellbeing Economy Alliance is a collaboration
of over 50 organizations focused on implementing a sustainable economy. Using
whole system approaches, these groups could strongly facilitate high-level
system change.

Initial collaborative work should include establishing a
vision of sustainable society. The SDGs would be a major component of this.
With the vision clear, at least at a broad level, practical, integrated
strategies for achieving it can be developed.

At the business and economic level, a primary system change
theme should be holding businesses fully responsible for negative impacts (i.e.
effectively applying the rule of law). This relates to the Wrong Perspective
and Wrong Reference Point deception techniques discussed in Global System Change. Synthetic
chemicals and many other substances regularly are used in the US and most other
countries without independent safety testing. The implied position is that
these materials are safe until proven unsafe. But this is the wrong
perspective. Anything that threatens life and the environmental systems that
sustain life should be considered unsafe until proven safe with independent
research at a high level of certainty.

Having routinely violated the first standard, we compound
the problem by violating the second. Materials that never should have been used
in the first place without independent safety testing continue to be used when
independent research shows them to be harmful. To protect shareholder returns,
vested interests often argue that products or processes should not be restricted
unless there are high levels of certainty that they are causing harm. But this
is the wrong reference point. The priority is protecting human life and
well-being, not shareholder returns. Parents would not wait for high levels of
certainty that children were at risk before protecting them. Once independent,
peer-reviewed research indicates potential harm (perhaps in the 10 to 20
percent certainty range), risky products and processes should be restricted.

To protect financial returns, vested interests frequently
will argue that limiting potentially harmful activities will threaten jobs and
the economy. The implication is that we cannot have good jobs and a stable
economy unless we degrade life support systems and society. Obviously this is
incorrect. Holding companies to a higher standard (full responsibility) will
compel them to achieve it.

Another vested interest deception involves arguing that harm
should not be prohibited until it can be accurately quantified. But as noted,
some intangible and other impacts cannot be specifically quantified. To protect
returns, vested interests essentially argue that they should be allowed to
continue harming the environment and society until we know exactly how much
harm is occurring. This is not rational. Again, the priority is protecting life
and well-being, not financial returns.

There are several ways to hold companies responsible for
uncertain levels of harm. For example, panels of independent experts could
estimate tangible and intangible harm. To ensure that we err on the side of
protecting society, harm estimates could be increased by a significant
percentage. As new information becomes available, more accurate estimates could
be used. Following expert estimation, companies could be held responsible
through tax, fee and other mechanisms. Responsibility could be phased in to
minimize disruption. But the phase in should not be unnecessarily extended.
Ending the current disruption caused by massive environmental and social
degradation takes priority over disrupting business operations.

Effective high-level system change would include a suite of well-coordinated,
short-term, mid-term and long-term actions. It is impossible to anticipate all
critical work needed for effective system change. As a result, whole system strategies
would evolve based on experience and new information.

To build commitment to system change, collaborative groups
should identify low hanging fruit – relatively easy, low cost system change
actions that provide substantial benefits. These could include tax and
regulatory changes that incentivize sustainable corporate behavior. This
combined with media and awareness raising campaigns will accelerate system
change.

Political reform is another critical aspect of high-level
system change, in large part because substantial economic reform cannot occur
without it. A whole system perspective shows that companies must be held
responsible for all significant harm. In competitive markets, this is the only
way that they can act in a fully responsible manner and remain in business.
Only government can hold business fully responsible for negative environmental
and social impacts. This is a main reason why political reform is more
important than economic reform.

An article called System
Change Investing and Political Reform[ii], published in the Cadmus
Journal of the World Academy of Art and Science, summarizes many aspects of
political reform. One of the most important is establishing true democracy.
Many system change efforts focus on implementing sustainable capitalism. But the
economy is the servant of society. The emphasis should be on democracy, not
capitalism or any other economic form. Once the people control their government
and society, they can use rational, whole system thinking to select the
economic structures that objectively provide the greatest benefits for the
least cost in each situation. For-profit companies will play a major role in
sustainable society. However, additional structures, such as employee-owned,
cooperative, non-profit and public, would be used in cases where they
objectively maximize social well-being.

The emphasis on political reform does not mean that economic
reform is not important or should not be addressed until political reform is
achieved. Replacing plutocracy (control of government by the wealthy, as in the
US), totalitarian democracy (citizens vote but have little control of
government, as in China), and other unjust forms of government with democracy (citizens
equally control government) is a longer-term issue. A whole system approach to
sustainability and the SDGs would include many simultaneous economic and
political reform activities. Emphasis should be placed on expanding economic
reform efforts that already are being implemented around the world, such as using
more accurate measures of social well-being than GDP.

Ultimately, holding companies fully responsible for negative
impacts is the only way to achieve the SDGs and sustainability. Governments
that are heavily influenced or controlled by business, such as the US
government, obviously cannot do this, in the same way that a person accused of
a crime could not reliably serve as their own judge and jury. Only governments
that are truly controlled by the people (democracy) can effectively hold
business responsible and protect citizens’ short-term and long-term well-being.

Key political reform leverage points include internal
government change, public pressure, and influence from the corporate and
financial sectors. Governments that are heavily influenced by vested interests are
unlikely to change on their own. Uniting and empowering citizens to work
together on their many common interests, such as compelling government to apply
the rule of law to business, is a longer-term issue.

The most effective short-term economic and political reform
strategy is to engage the corporate and financial sectors in system change
through System Change Investing. Companies and wealthy investors already
heavily influence government, often in negative ways that allow more harm and
thereby increase shareholder returns. SCI encourages companies to work for
systemic changes that hold them fully responsible, and thereby make acting
responsibly the profit-maximizing strategy.

Companies and investors frequently will resist changing
systems that provide short-term financial benefits, as they originally resisted
the sustainability movement. Twenty years ago, many companies believed that
implementing sustainability strategies would reduce profitability. But
environmental and social issues are increasingly financially relevant.
Therefore, effectively addressing them can enhance profitability, like
effectively addressing any other financially relevant issue would. As this was
better understood over the past 20 years, sustainability became mainstream in
the corporate and financial sectors.

The same will happen with system change. Flawed systems
increasingly harm companies by compelling them to degrade the environmental and
social systems that sustain business. System change is the most important
action needed to eliminate negative impacts, and thereby protect and enhance
business and society.

The next section summarizes how investing was used to engage
the corporate sector in sustainability. This lays the foundation for the
following section, which summarizes how investing can be used to engage the
corporate and financial sectors in timely, effective system change.

Sustainable/Responsible
Investing

In the late 1990s and early 2000s, Innovest Strategic Value
Advisers pioneered a new approach to Sustainable/Responsible Investing (SRI).
Up to that point, nearly all SRI involved negative or ethical screening (i.e.
not investing in sectors to which one is ethically opposed). This often reduces
portfolio diversity, which can increase risk and lower returns.

Innovest was one of the first organizations to argue that
environmental, social and governance (ESG) issues are increasingly financially
relevant. Therefore, taking them into account could increase investment
returns. The company advocated positive screening (i.e. remaining in sectors and
shifting investments toward ESG leaders). This can increase returns by
maintaining portfolio diversity while investing in presumably better managed
companies.

Some studies found that ESG funds underperform and irrationally concluded that ESG investing (SRI) reduces returns. With most asset classes, some funds outperform while others underperform. The key SRI performance question is: Are ESG issues financially relevant? Obviously they are. Attracting and retaining a high-quality workforce, reducing waste, energy and materials costs, making safe, appealing products, improving relations with suppliers, governments, communities and other stakeholders, establishing a reputation as a responsible company, and nearly all other ESG-related actions can provide substantial financial and competitive benefits.

Using compelling research and logic, Innovest strongly made
the case that failing to adequately address ESG issues violates the fiduciary
obligation to maximize returns, as ignoring any other financially relevant
issue would. If an ESG fund underperforms, it is not because taking ESG issues
into account generally lowers returns. As with many other underperforming funds,
the primary cause is suboptimal research, construction and management.

Innovest’s Managing Director of Research, Frank Dixon (the
author of this article), developed or substantially modified Innovest’s ESG rating
models. He also developed the company’s research and rating processes and
materials, including scoring guidelines, analyst training materials, and
company, sector and ESG issue report templates. He oversaw the ESG analysis and
rating of the world’s 2,000 largest companies. The primary focus was on determining
how ESG issues add financial and competitive value for companies and investors.
Dixon used extensive ESG research experience and business judgment to determine
which ESG metrics were financially relevant in each sector and assign metric
and model weightings.

The approach was highly successful. Without considering
financial metrics or performance, Innovest was able to consistently identify
financial leaders and add alpha for investors. Splitting sector lists of rated
companies in half, ESG leaders outperformed laggards by 300 to 3000 basis points
per year over nearly any time period in all high impact sectors and nearly all
other sectors.

Innovest’s ratings accurately predicted superior financial
performance for two general reasons. They accurately assessed the extent to
which companies were effectively managing financially relevant ESG-related
risks and opportunities. And their ratings were strong indicators of management
quality. Nearly any financial analyst would say that management quality is the
primary determinant of superior financial returns, because it affects virtually
every aspect of business operations. But management quality is intangible. It
cannot be measured directly.

ESG ratings are strong indicators of management quality
because sustainability is a complex challenge. There are high levels of
technical, regulatory and market uncertainty as well as many stakeholders,
complex issues and intangible factors to address. Leading sustainability
performance strongly indicates sophisticated management that will perform well
in other business areas, and thereby earn superior financial and stock market
returns.

Innovest sold their research to large pension funds and
other institutional investors around the world. The company was purchased by MSCI
in 2010. The business case arguments and positive screening methodologies pioneered
by Innovest are now mainstream. Many academic, business and financial sector
leaders regularly use the same arguments that Innovest first made in the 1990s.
Innovest and other companies provided the research that investors needed to
take ESG performance into account. Financial community interest was a main
factor compelling nearly all large companies to implement sustainability
strategies.

System Change Investing

Virtually the entire corporate sustainability movement and
$23 trillion global SRI market are focused on voluntary company change – voluntarily
reducing negative environmental and social impacts, for example, by lowering
pollution and selling low-impact products. But as noted, system change is at
least 80 percent of the sustainability solution. One could even argue that it
is closer to 100 percent.

If companies are held fully responsible for negative
impacts, exhortations to voluntarily reduce impacts will no longer be needed.
Companies will eliminate negative impacts (i.e. stop harming the environment
and society) not only because this will be the profit-maximizing approach. It
also will be the only way to survive.

SCI shifts the focus from company change to system change.
It is the most significant transformation in the SRI and corporate sustainability
fields in 20 years.

SCI is the highest-leverage short-term system change option.
The approach involves rating companies on system change performance and using
the research to develop SCI funds. It is based on proven, successful
techniques. SRI strongly drove corporate sustainability over the past 20 years.
SCI will do the same with system change.

SCI provides large financial and sustainability benefits.
System change is the most important, and therefore most financially relevant,
sustainability issue. SCI adds financial value by assessing management of
systemic risks and opportunities as well as providing excellent indicators of
management quality.

System change is the most complex management challenge, more
difficult than implementing conventional sustainability strategies. No company
can achieve mid-level and especially high-level system change on their own.
Successful system change engagement requires strong collaboration, public
communication and big picture thinking skills. Superior system change performance
strongly indicates sophisticated management that will perform well in other
business areas, and thereby earn superior returns. SCI ratings can be used as an
overlay on value, growth, index and nearly any other type of investment fund to
significantly enhance returns.

A growing number of institutional investors, especially
pension funds and other long-term focused investors, are seeking systemic
approaches that provide substantial sustainability benefits. SCI is the
ultimate systemic approach for the capital markets. Using whole system thinking,
it effectively engages the corporate and financial sectors in evolving economic
and political systems into sustainable forms. SCI can provide far greater
sustainability benefits than any other type of SRI because it is focused on the
most important sustainability issue – system change.

Like SRI, the key to SCI success is providing strong
business cases and practical, return-enhancing models. Corporate and financial
sector managers could place their jobs and companies at risk if they fail to
discuss economic and political reform in an appealing and logical manner. SCI
provides compelling business case arguments for system change. They clearly
describe how flawed systems increasingly threaten and harm companies, in large
part by placing them in systemically-mandated conflict with society.

The summary business case for system change is this – As the
human economy expands in the finite Earth system, negative corporate impacts
return more quickly to harm businesses, often in the form of market rejection,
lawsuits and reputation damage. Companies have increasingly strong financial
incentives to reduce negative impacts. The vast majority only can be mitigated
through system change. Improving flawed systems is essential for long-term, and
increasingly shorter-term, business success.

In the short-term, investment returns can be enhanced by
investing in system change leaders (because they virtually always will be
better managed companies). Over the longer-term, as economic and political
systems are evolved into forms that broadly benefit society, instead of mainly
benefiting shareholders, overall returns might decline. But the goal should be
to achieve this through a logical, minimally disruptive, well-managed process.
Economic and political systems will be established that provide sustainable
investment returns without degrading the environment and society.

The first SCI model, called Total Corporate Responsibility
(TCR®), was developed by Frank Dixon in 2003. As the head of
research at Innovest, he saw thousands of examples of flawed systems compelling
companies to degrade the environment and society by preventing them from fully
eliminating negative impacts. He used his ESG modeling and rating expertise to
develop a new type of corporate sustainability rating model. As the name
implies, Total Corporate Responsibility refers to fully eliminating negative
impacts. System change is required to mitigate most impacts. Therefore, TCR is
a system change-based approach.

Rating corporate system change performance is more complex
than rating traditional ESG performance. The framework or context is much larger.
ESG rating focuses largely on unilateral corporate efforts to voluntarily reduce
negative impacts, for example, by selling sustainable products and services.
The framework for system change rating ultimately is the whole Earth system and
its sub-element human society. Before corporate system change performance can
be assessed, necessary economic, political and social system changes must be
understood. With this framework clear, the optimal corporate role in achieving
these changes can be defined.

After developing TCR and advising Walmart and other companies on sustainability and system change, Dixon conducted several years of multidisciplinary research to write Global System Change. This provides the framework needed for effective corporate system change rating.

ESG research is used to develop SRI funds. The research
needed to create SCI funds could be called ESGS (environmental, social,
governance, systemic). TCR illustrates how SCI ratings and funds could be
developed. The TCR model is segregated into three performance categories –
traditional ESG, mid-level system change and high-level system change. It
includes the rating principles, metrics, weightings, data sources and proxies
needed to effectively rate corporate system change performance.

System change metric categories include public statements
about system change and sustainability, media and awareness raising campaigns,
engagement in system change collaborations, efforts to address specific
economic and political system flaws, government influence activities including
campaign finance and lobbying, and supporting NGOs, academia and other groups
promoting system change.

TCR uses a best-in-class rating approach. Nearly all large companies
have ESG strategies. A growing number are engaged in collaborative mid-level
(sector-level) system change. But few companies are engaged in high-level
system change. As a result, this performance category initially would have
lower weighting in the TCR model. The performance bar also would be set lower.
As more companies engage in high-level system change, performance standards and
weightings would increase.

SCI defines the most advanced form of corporate
sustainability. The model identifies the actions needed to achieve superior
corporate system change performance. These metrics provide a system change
roadmap for businesses. Many companies value and seek to maintain high ESG
ratings, in large part because SRI fund inclusion can drive up stock prices. As
it becomes more widely known that system change is the most important
sustainability issue, effective engagement in this area will be essential for
maintaining high corporate sustainability ratings.

Voluntary Versus Mandatory
Corporate Responsibility

Many companies are achieving near record profits. But these
earnings are based on extensive externalized costs and environmental/social degradation.
It is not rational, fair or sustainable to profit by degrading life support
systems and society. This destructive form of business obviously will end,
probably soon.

Expanding corporate purposes to broadly benefiting society,
adopting B-Corp structures and other voluntary corporate sustainability efforts
are highly beneficial, but not nearly enough. Voluntary corporate
responsibility cannot work. Abiding by the rule of law (not harming society)
must be mandatory, not voluntary. It is more important to apply the rule of law
to companies than individuals. People can and usually would act responsibly if
there were no requirements to do so. For example, most people would not murder
anyone if murder laws were removed. But companies often cannot voluntarily stop
harming the environment and society under current systems in competitive
markets. That is why acting in a fully responsible manner must be mandatory.

Current leading edge corporate sustainability approaches focus
on voluntarily benefiting all stakeholders. But this often is not the most
effective orientation. Some argue that it is not the responsibility of business
to broadly benefit society. But no one could logically argue that businesses
should be allowed to harm any stakeholder group or society in general. It usually
would be more effective to focus on harm instead of benefits.

People who oppose corporate sustainability because they do
not think companies should be compelled to benefit more than shareholders do
not understand this field. There might be no obligation to broadly benefit
society. But there certainly is no right to harm stakeholders or society. The
key issue and focus of corporate sustainability should not be on voluntarily
benefiting stakeholders. It should be on requiring companies to end the substantial
harm they are imposing on the environment and society.

Ending harm often involves providing benefits, such as when
employees are paid living wages or customers receive safer products. But in
public discourse, the emphasis often should be on mandatory responsibility, not
voluntary benefits. Voluntarily providing benefits could be debated. But mandating
responsible behavior (i.e. prohibiting substantial, objective harm) is not
debatable (within the realm of logic).

Vested interests often argue that some types of harm are an
inevitable part of providing the beneficial products and services demanded by
society. If we allow this standard, we will achieve it, and no better. Under
current systems, companies often cannot afford to eliminate negative impacts
and remain in business. If we implement systems that hold business to a higher
standard (provide products and services without causing harm), they will figure
out how to achieve it or cease to exist.

We have the technology and know-how to largely resolve many
environmental and social problems. But it often is difficult to implement these
approaches. Current systems frequently create the illusion that harmful
products and services are less expensive than non-harmful ones. Flawed systems
externalize extensive burdens, costs and negative impacts, and thereby greatly
increase total costs to society. Under sustainable systems that take all relevant
costs and impacts into account, non-harmful products and services virtually
always would be the low cost, highest benefit options.

An approach called Net Positive Impact focuses on maximizing
positive impacts and minimizing negative ones. It implies that negative impacts
are acceptable if positive impacts are greater. But we do not allow someone to murder
a few people on the weekend if they help many more people during the week.
Virtually all companies have positive impacts. They would not exist if they did
not. Positive impacts largely are irrelevant to negative ones. Doing good does
not justify or allow doing bad. Focusing on benefiting stakeholders can seem
voluntary and altruistic. It distracts attention from the far more important
issue – ending the massive harm currently being done to stakeholders and
society in general.

In civilized society, harm must be prevented. Instead of
focusing on net positive impacts, the emphasis should be on achieving zero
negative impacts. This is the focus of TCR. To achieve the SDGs and
sustainability, we must switch the focus of SRI and corporate sustainability
from voluntarily doing good to prohibiting causing harm. Companies cannot
voluntarily end all harm under current systems and remain in business. But they
can voluntarily work with others to change the systems that compel them to
cause harm. Voluntary system change is the only approach that has the potential
to achieve the SDGs.

Failing to adopt a whole system perspective is causing us to
make the same mistakes as past civilizations. Currently, sustainability
advisers and other groups usually must make the business case for
sustainability to encourage companies to reduce negative impacts. Future
generations will see this behavior as insane and horrible, in the same way that
we view slavery. We should not have to plead with companies to stop harming
children and other people. Obviously, not causing harm must be mandatory. We
must begin to apply the same responsibility standards to businesses that we currently
apply to individuals.

In a rational and sustainable world, the focus will be on
the society case or social well-being case, not the business case. Business
activities that cause significant, objective harm will not be allowed. We do
not need to make the case for not murdering someone. It simply is prohibited.
Under sustainable systems, the same will be true with business harm. The
business case might be needed to encourage companies to voluntarily benefit
stakeholders. But it is not needed to prohibit causing harm. In sustainable
society, the implied business case would be, act responsibly or cease to exist.

Many people believe that modern economic and political
systems are beneficial and sustainable. The systems obviously provide benefits.
But they ultimately are suicidal. In a battle between reality and perceived
reality (myopic human ideas about economic and political systems), reality
always ultimately wins. Reality will correct mistaken ideas about current
systems.

Flawed systems will change one way or another. Companies and
their investors are far better off taking a seat at the system change table and
helping to manage the process in a beneficial, minimally disruptive manner,
rather than suffering the consequences of system collapse.

System change will massively benefit business and society. As perceived reality inevitably aligns with this reality, system change will quickly occur. Extensive system changes are needed in all major areas of society. Global System Change describes these changes and how to implement them. In the shorter-term, SCI is the most effective way to drive the systemic changes needed to achieve the SDGs and maximize the long-term well-being of humanity.

∞

Frank Dixon
established Global System Change in 2005 when he recognized that system change
would become the dominant sustainability issue of the 21st Century.
His experience as the Managing Director of Research for the largest ESG
research company (Innovest) and sustainability advisor to Walmart and other
organizations showed that flawed economic and political systems compel all
companies to degrade the environment and society. He conducted several years of
multidisciplinary research to produce a true whole system approach to
sustainability (described in the Global System Change books). The approach
provides practical system change strategies for all major areas of society. In
the corporate and financial sectors, System Change Investing represents the
most advanced and effective sustainability strategy. Frank Dixon advises
businesses, investors and governments on sustainability and system change. He
has presented at many corporate and financial sector conferences around the
world, as well as leading universities, including Harvard, Yale, Stanford, MIT
and Cambridge. Frank Dixon is an Associate Fellow of the World Academy of Art
and Science. He has an MBA from the Harvard Business School.